Advertisements

Deutsche Bank Faces A Smaller, Poorer Future

The London offices of Deutsche Bank. On July 24, 2019, Deutsche Bank reported a headline loss of €3.1bn which it said arose from the radical restructuring plan it commenced this month, in which its operations in the U.K. and U.S. are being drastically cut. (Photo by Alberto Pezzali/NurPhoto via Getty Images)

Deutsche Bank has issued its results for the second quarter of 2019. They make grim reading. The bank reported a headline loss of €3.1bn ($3.44bn), which it said was due to “charges relating to strategic transformation” of €3.4bn ($3.78bn). But both net income of £231m ($256.67m) and underlying profits of €441m ($490m) were significantly down on the same quarter in 2018.

The restructuring announced earlier this month has yet to impact fully. The “capital release unit” into which the bank plans to put €74bn ($82.22bn) of poorly-performing and non-strategic assets and business lines, including its entire equities trading division, is not yet up and running, and although headcount is about 4,500 lower than it was a year ago, the latest round of sackings doesn’t yet show up in the redundancy costs. Restructuring costs themselves therefore only contribute €50m ($55.56m) to the headline loss.

A further €350m ($388.89m) comes from junking software and service contracts that will no longer be needed because of the restructuring. But by far the largest part of the headline loss arises from impairment of goodwill to the tune of €1bn ($1.11bn) and a €2bn ($2.22bn) reduction in the value of the bank’s deferred tax asset.

This may sound like accounting gobbledegook, but it sends a very important message. Deutsche Bank’s management has admitted the bank will never return to the profitability of the past. When the restructuring is complete, it will be a much smaller, poorer bank.

First, the writedown of the deferred tax asset (DTA). A DTA arises when a firm pays taxes in advance and then suffers losses that wipe out that tax liability, resulting in an overpayment. Rather than claiming back the money, firms can “carry forward” the overpayment and use it to offset their tax liability in a subsequent reporting period. This “carried forward” amount is shown as an asset on the balance sheet.

However, a firm can only carry forward overpaid tax into subsequent periods if it is reasonably certain that the firm will eventually make enough profits to be liable for that amount of tax; and there is usually a time limit by which the deferred asset must be used. If the firm can’t generate enough profits to use the DTA, it is lost.

This is how Deutsche Bank explains its decision to write down the DTA (my emphasis):

Each quarter, the Group re-evaluates its estimate related to deferred tax assets, including its assumptions about future profitability. In updating the strategic plan in connection with the transformation the Group adjusted the value of deferred tax assets in affected jurisdictions. This resulted in total valuation adjustments of € 2.0 billion in the second quarter of 2019 that primarily relate to the U.S. and the UK.

Deutsche Bank has admitted that the deep cuts to the investment bank will result in profitability being significantly lower for the foreseeable future.

Now to goodwill. Goodwill can be regarded as another type of overpayment. It is the amount by which the purchase price of an asset or business exceeds the fair value of the tangible and intangible assets acquired and any liabilities taken on. Firms overpay for acquisitions when they expect them to deliver higher returns in future. But if they disappoint, then eventually the value of the “goodwill” must be reduced.

In two divisions – corporate finance, and the wealth management unit within its private & commercial banking division – Deutsche Bank has written off its entire goodwill, amounting to €491m  ($545.56m) in corporate finance and €545m ($605.56m) in wealth management. Importantly, the notes to the accounts show that the write-off is not a restructuring cost; these are business lines that have been under-performing for quite some time. The bank blames “adverse industry trends” and “worsening macroeconomic assumptions, including interest rate curves.” This is code for “we thought interest rates would be much higher by now.” Revenues have persistently disappointed because of very low interest rates, and now that the European Central Bank has indicated that rates will stay low for the foreseeable future – and may even be cut further – there is no real prospect of recovery. These business lines are simply never going to make enough money to cover their acquisition cost. Cue transfer to the “capital release unit” as soon as it is up and running.

The good news is that the €3bn ($3.33bn) writedown of DTA and goodwill didn’t affect the bank’s capital. The all-important CET1 capital ratio stayed firm at 13.4%. But looking ahead, there are clearly more restructuring costs to come. The bank says it currently has provisions for about €1bn ($1.11bn). It expects to use all of this, and it may need more. And Deutsche Bank also faces further litigation charges which it admits could be considerable.

But the biggest problem is Deutsche Bank’s desperate lack of income. Troubled though it is, the investment bank is still Deutsche Bank’s biggest source of revenue. The planned cuts will slash that to the bone, and there is no evidence that any of the other divisions can step up to replace it. All Deutsche Bank’s divisions, apart from its asset manager DWS, have flat or declining revenues and poor profitability. Unless it can turn this around, the future looks very bleak.

Despite the management’s upbeat presentation, the share price fell on these results. Shareholders were clearly unimpressed with the promise of “jam tomorrow” in the form of dividends and share buybacks from 2022. Perhaps they, like me, were looking at the bank’s promise to turn ROTE of negative 11.2% today into positive 8% by 2022, and thinking, “I don’t believe a word of it.”

Forbes Special Report: Picking the right investment opportunities is critical. Get insights from top advisors in the free report 9 Stocks To Buy For The Second Half.

 

I used to work for banks. Now I write about them, and about finance and economics generally. Although I originally trained as a musician and singer, I worked in banking for 17 years and did an MBA at Cass Business School in London, where I specialized in financial risk management. I’m the author of the Coppola Comment finance & economics blog, which is a regular feature on the Financial Times’s Alphaville blog and has been quoted in The Economist, the Wall Street Journal, The New York Times and The Guardian. I am also a frequent commentator on financial matters for the BBC. And I still sing, and teach. After all, there is more to life than finance.

Source: Deutsche Bank Faces A Smaller, Poorer Future

Advertisements

U.S. Bank Regulatory Easing Is Negative For Investors And Taxpayers

Storm clouds behind the exterior of the Federal Reserve building in Washington, DC

Storm clouds behind the exterior of the Federal Reserve building in Washington, DC

In a disappointing decision, the Federal Reserve Board announced yesterday that effective this year, it will limit its use of the “qualitative objection” in Dodd-Frank’s Comprehensive Capital Analysis and Review (CCAR). Under Dodd-Frank’s Title I, banks that are designated as systemically important are required banks to design a model using stress scenarios from the Federal Reserve. In order to pass the stress test, banks need to demonstrate that they would be able to meet Basel III capital and leverage requirements even in a period of stress.  It is in the qualitative portion of CCAR, that the Federal Reserve can identify and communicate to the market if a bank is having problems with its internal controls, model risk management, information technology, risk data aggregation, and whether a bank has the ability to identify, measure, control, and monitor credit, market, liquidity and operational risks even during periods of stress.  Easing this requirement, in combination with all the changes to Dodd-Frank that have been taking place since last year, is dangerous to investors, not to mention taxpayers, especially so late in the credit cycle.

Parts of the test that each firm is subject to this year in addition to the hypothetical scenario.

Parts of the test that each firm is subject to this year in addition to the hypothetical scenario.

*All firms subject to the qualitative objection, except TD Group, will have their fourth year in the 2020 cycle. TD Group’s fourth year will be the 2019 cycle.

According to the Federal Reserve’s press release “The changes eliminate the qualitative objection for most firms due to the improvements in capital planning made by the largest firms.”  Yes, there have been improvements in capital planning precisely, because there were consequences to banks which failed the qualitative portion of CCAR. Banks were prohibited from making capital distributions until they could rectify the problems the Federal Reserve found in the CCAR exercise.  This decision essentially defangs the CCAR qualitative review of banks’ capital planning process.

Nomi Prins

Nomi Prins

Dean Zatkowsky

“It is absolutely reckless of the Fed to relinquish its regulatory authority in such a manner, rather than retain the option of qualitative oversight, which has turned up red flags in the past,” said Nomi Prins former international investment banker. “We are after all, talking about what the banks deem a reporting burden versus necessary oversight that could detect signs of a coming credit or other form of banking related crisis from a capital or internal risk management perspective. Why take that risk on behalf of the rest of our country or the world?”

In writing about the Federal Reserve’s decision, the Wall Street Journal wrote that “Regulators dialed back a practice of publicly shaming the nation’s biggest banks through “stress test” exams, taking one of the biggest steps yet to ease scrutiny put in place after the 2008 crisis.” It is not public shaming. It is called regulators doing their job, that is, providing transparency to markets about what challenges banks may be having. Without transparency, the bank share and bond investors cannot discipline banks.

Just last month, the Federal Reserve Board announced that it would be “providing relief to less-complex firms from stress testing requirements and CCAR by effectively moving the firms to an extended stress test cycle for this year. The relief applies to firms generally with total consolidated assets between $100 billion and $250 billion.”

Christopher Wolfe

Christopher Wolfe

Fitch Ratings

Investors in bank bonds, especially, should be concerned about recent easing of bank regulations. Immediately after the Federal Reserve decision was announced yesterday, Christopher Wolfe, Head of North American Banks and Managing Director at Fitch Ratings stated that “Taken together, these regulatory announcements raising the bar for systemic risk designation and relaxed standard for qualitative objection on the CCAR stress test reinforce our view that the regulatory environment is easing, which is a negative for bank creditors.”  Fitch Rating analysts have written several reports about the easing bank regulatory environment being credit negative for investors in bank bonds and to  counterparties of banks in a wide array of financial transactions.

Dennis Kelleher

Dennis Kelleher

Better Markets

Also, a month ago, the Federal Reserve announced that it will give more information to banks about how it uses banks’ data in its model to determine whether banks are adequately capitalized in a period of stress.  In commenting on the Federal Recent decisions, Better Markets President and CEO Dennis Kelleher stated that “Stress tests and their fulsome disclosure have been one of the key mechanisms used to restore trust in those banks and regulators.  By providing more transparency to the banks in response to their complaints while reducing the transparency to the public risks snatching defeat from the jaws of victory in the Fed’s stress test regime.”

Gregg Gelzinis

Gregg Gelzinis

Center for American Progress

Gregg Gelznis, Policy Analyst at the Center for American Progress also expressed his concern about the Federal Reserve’s recent changes to the CCAR stress tests.  “While Federal Reserve Chairman Jay Powell and Vice Chairman for Supervision Randal Quarles have spoken at length about the need for increased stress testing transparency, this transparency only cuts in one direction.” He elaborated that the Federal Reserve’s decision “benefits Wall Street at the expense of the public. The Fed has advanced rules that would provide banks with more information on the stress testing scenarios and models. At the same time, they have now made the stress testing regime less transparent for the public by removing the qualitative objection—instead evaluating capital planning controls and risk management privately in the supervisory process.”

Follow me on Twitter or LinkedIn. Check out my website.

I have been dedicated to providing clients high quality financial consulting, research, and training services on Basel III, risk management, risk-based supervision

Source: U.S. Bank Regulatory Easing Is Negative For Investors And Taxpayers

Is Artificial Intelligence Replacing Jobs In Banking – Vishal Marria

1.jpg

Over the past 12 months, the banking industry has become increasingly excited about AI. Virtually every leading consultancy has published research on the impact AI will have on the sector and investment continues to pour into developing innovative solutions. But, alongside all the buzz comes the inevitable concern that the implementation of this technology will reduce the need for actual human workers. The notion here is simple – if a bank can automate a process then surely they don’t need a human to do it….

Read more: https://www.forbes.com/sites/vishalmarria/2018/09/26/is-artificial-intelligence-replacing-jobs-in-banking/#63e9c0fa3c55

 

 

 

Your kindly Donations would be so effective in order to fulfill our future research and endeavors – Thank you

 

 

%d bloggers like this:
Skip to toolbar